The shock waves felt from the 1996 "hedge-to-arrive" crisis continue to be felt both in and out of court.
Judges have handed down important decisions in lawsuits originating in the "HTA" troubles, which is news by itself (see box, p.9). A bigger question is what impact the problem has had on farmers' use of sophisticated financial risk-management techniques -- something that many in the agricultural world believe that producers must learn to use to operate successfully in the "freedom to farm" environment that's coming. Once the federal phaseout of support payments runs its course, farmers -- and, by association, farm bankers -- will face unprecedented levels of market risk with only their crops and their financial planning to meet them.
"Hedge-to-arrive" contracts were complex financial agreements struck between farmers and the cooperative or private grain elevators that store their crops -- particularly, in this case, corn. In the form they took prior to the recent controversy, they gave farmers considerably more freedom in delivery than previously -- even allowing rollovers to subsequent crop years under some circumstances. How this interacted with unusual market conditions helped bring about the troubles surrounding these highly complex contracts.
Depending on who one asks and where in the country that person is, the "hedge-to-arrive" aftershocks have either undone years of farmers' learning to become comfortable with hedging and related practices or been a temporary, although notable and sobering, event that blip on the timeline.
"HTA contracts set risk management practices back 10 to 20 years. Now farmers are afraid to try anything," says Randy Allen, crop marketing consultant with his own firm, RWA Financial Services, Inc., Austin, Texas. There are much more basic tools that have been around, in some form, since the 1800s, says Allen, but "farmers want to hit a home run every time. They don't want to just get profitable margins -- they want $12 soybeans." Allen brands HTAs as bordering on "speculating on speculation." He doesn't absolve the elevators either, believing that many elevator managers didn't really understand what they were offering when they promoted HTA contracts.
Even where farmers avoided exotic contracts like HTAs and stuck with the basics, the HTA affair has been hanging over their shoulders like a vulture, says marketing consultant Gary Dean, Deanfield Consulting, Prole, Iowa. "It's reminded people that freedom to farm is also freedom to fall."
"People are somewhat afraid of the financial side now, because of the problems last year," acknowledges corn farmer Ryland Utlaut of Missouri, who is the new president of the National Corn Growers Association. "However, these measures can be a useful marketing tool." Utlaut himself, farming in partnership with his brother, uses options and futures contracts from time to time.
"There hasn't been a lot of interest in marketing at all," says Diana Klemme, vice-president and grain division director at Grain Service Corp., an Atlanta a, hedging and risk management services firm. In part, this may not be so much a reaction to the HTA affair, she says, as a reaction to this year's crop prices and demand. Take soybeans, for which demand has been high in the face of few stockpiled beans. This results in little emphasis to store beans to bolster a financial strategy. The emphasis has been on plain old open-market sales, she says. "Sometimes you just need a flyswatter, not a nuke," Klemme observes.
Yet bankers here and there say farmers haven't deserted financial management methods by any means. "We're actually seeing a greater number of farmers using options than we have in the past," says John Gilbert, president of $56 million-assets Bank of Latah, Wash.
Much of the HTA problem was in the Corn Belt. To a degree, fear of financial techniques seems greatest where there were local HTA problems. …